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BRUSSELS / ROME (Reuters) – After Rome's refusal to change it, the European Commission on Wednesday took the first step towards disciplining Italy's expansionary budget, highlighting the stakes of a conflict that has alarmed the entire euro area and could eventually lead to fines.
We see flags of the European Union and Italy in downtown Rome, Italy, on October 19, 2018. REUTERS / Alessandro Bianchi
The Commission stated that the Italian project increases the structural deficit for 2019 by 1.0% of gross domestic product, which excludes exceptional items and fluctuations in the business cycle, instead of reducing it by 0.6% as foreseen. EU legislation.
Italy also does not want to reduce its huge debt in a "particularly serious case of non-compliance" rules, said the Commission, guaranteeing the launch of an excessive deficit procedure.
Italy's debt, at 131% of GDP, is proportionally the second highest in the euro area after Greece's. According to EU rules, it is expected to fall annually to 60%, but the Commission has indicated that it would be stable for the next two years.
"The opening of a debt-based excessive deficit procedure is therefore justified," said Valdis Dombrovskis, vice president of the Commission, during a press conference. "In a very high debt situation, Italy is forecasting essentially large additional borrowing, instead of the necessary fiscal prudence."
Italy believes that its borrowing and spending policy – which the Commission considers extravagant – would boost economic growth, help reduce the country's debt ratio and reduce unemployment, which was 10.1% in September.
Italian Prime Minister Giuseppe Conte, who is scheduled to meet on Saturday with Commission President Jean-Claude Juncker, said on Wednesday that the government was convinced that the budget was excellent and in the interest of Italy and Italy. l & # 39; Europe.
Economy Minister Giovanni Tria and Deputy Prime Minister Luigi Di Maio also made conciliatory remarks that Rome and the EU were pursuing the same goals and seeking a common solution.
"We want the same thing: reduce debt," said Di Maio on Facebook. Tria said that Italy felt that the "moderately expansionary" budget was needed to counter the slowing economy and that it "would continue the dialogue with the Commission in order to seek a common solution in our mutual interest ".
But as memories of the sovereign debt crisis that has almost destroyed the euro are still fresh, the Commission noted – like all the eurozone finance ministers this month – that problems in Italy could touch all other countries sharing the single currency.
Euro-zone Finance Minister Mario Centeno told The Hague that eurozone governments were supporting the Commission and would discuss Italy's controversial draft budget at their next meeting in December.
PROJECT 2019 BAD FOR ITALY
The Commission considers that the Italian budget for 2019 will not stimulate the growth expected by the eurosceptic government of Rome.
"The impact of this budget on growth may be negative for us. It does not contain significant measures to stimulate potential growth, perhaps even the opposite, "said Dombrovskis. "With what the Italian government has put on the table, we see a risk of instability for the country."
In Rome, the right wing government and the five-star anti-establishment movement remained provocative.
"We are convinced of the figures in our budget. We will talk about it in a year, "Matteo Salvini, vice-premier and leader of the League, told the press. Fines against Italy would be "disrespectful", he added.
Before any financial sanction, the Commission must be heard by the EU's Deputy Finance Ministers in the next two weeks and then by the Finance Ministers, probably at their next meeting in January.
This is very likely, given the joint statement of all the eurozone finance ministers who backed the Commission against Italy earlier in November.
In December, the Commission will prepare recommendations to Italy to reduce the debt and set a deadline of three to six months for ministers' action, to be approved by ministers in January.
Financial penalties would only be imposed if Italy did not comply with them.
Italy's borrowing and spending projects raised borrowing costs to 3.523% for the 10-year reference loan, and their spread on German paper more than doubled this year.
Bonds, however, rebounded on Wednesday, resulting in a two-year decline in yields of up to 23 basis points, as markets rejected the Commission's rejection of the Rome draft budget and focused on the possibility of a compromise between the two parties. .
Mr Dombrovskis said that higher borrowing costs were already hurting the economy.
"Uncertainty and rising interest rates are weighing heavily on the Italian economy. In addition, this prevents Italian banks from lending to Italian businesses and households at an affordable cost, "he said.
Report by Jan Strupczewski and Gavin Jones; Additional report by Bart Meijer in The Hague; Edited by Mark Heinrich and Hugh Lawson
